Client running out of money…has been on SEPP plan since 2006
I have a client who has been on SEPP Plan since 2006. He hasn’t reduced his SEPP since he started. He couldn’t afford to take advance of reducing his SEPP when there was an opportunity back in the day. He started SEPP at age 35yrs. old currently 52yrs. old and will run out before he reaches 59.5yrs old.
Are there any strategies I should consider to keep him from running out of money? i.e. Can we reduce his current SEPP amount because his account will run out? Anything else?
Permalink Submitted by Alan - IRA critic on Wed, 2023-05-10 20:30
SEPPs should rarely be started prior to age 50 because there are too many unpredictable financial changes that will occur over such a long period. One of those is inflation. If client’s IRA is totally drained there is no retroactive penalty or interest due. However, client is still allowed to make a one time switch to the RMD method and that will usually reduce the required distribution. Such a switch is best made effective next Jan, and not midyear. Client might calculate what the 2024 SEPP distribution will be if this switch is made effective 1/1/2024. Therefore, client has two ways to avoid busting the plan, either let the IRA balance go to 0 while taking the correct distribution, or making the switch to the RMD method which will extend the plan be reducing the distribution. 17 years of penalties plus late interest on the penalties is probably unaffordable.
Permalink Submitted by David Mertz on Wed, 2023-05-10 21:45
Why is the IRA running dry a concern? If the concern is that the client will run out of spending money, the only way for the client to avoid running out is to spend less or to sell other assets; reducing SEPP distributions won’t fix spending beyond his means. If the money isn’t needed for spending, after being distributed from the IRA under the SEPP it can be invested outside of the IRA, with gains potentially being taxable at a lower, long-term capital-gains rate.